Economy: CBI forecasts slower growth during second half of 2014

CBI director general John Cridland. CBI director general John Cridland.

Thursday, September 4, 2014
6:00 AM

Economic growth will slow in the second half of the year as the effect of improved confidence and better credit conditions starts to wear off, the CBI has predicted.

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The business group said the recovery was “on solid ground” but expected expansion to ease to 0.7% in the third quarter and 0.6% in the final three months of the year, after growth of 0.8% in each of the first and second quarters.

It also warned of political risks, including the possibility of a Scottish yes vote on independence and the possibility of a Labour government intervening in the energy sector and other markets. However, it insisted it was non-party political and was also “not very keen” on the Tories’ migration targets.

Meanwhile, it increased its forecast for house price growth for this year to 9.5%, up from 3.5% in 2013, with a prediction of 5.3% for next year.

The CBI’s forecast for gross domestic product (GDP) growth for this year and next remained unchanged at 3% and 2.7%.

It said the recent period of accelerating growth would ease as the initial impact of business and consumer confidence, improving credit conditions and reductions in uncertainty started to wear off.

The slowdown also reflected weakness in productivity and wage growth, the CBI said, but added that it expected a gradual improvement, predicting average earnings to increase by 1% this year and by 2.4% in 2015.

Its view that signs of a pick-up in pay growth would be needed before an interest rate hike backed the stance of Bank of England governor Mark Carney, who led most of the rate-setting Monetary Policy Committee in not voting for a rise last month.

CBI director-general John Cridland also brushed off suggestions that Mr Carney’s apparent changes of tack on when rates would rise were confusing, saying businesses understood his approach.

Mr Cridland said: “The UK’s recovery is on solid ground, with our quarterly growth on average outstripping G7 competitors over the last year.

“For the rest of the year, we expect growth to get onto a more even keel and the recovery to become further entrenched next year.

“Business investment has been growing better than expected so far this year, but it still has a lot of catching up to do to get back to its pre-crisis level.

“Although hundreds of thousands of new jobs are being created in the economy, there is little upward pressure on starter salaries outside a few hot spots, such as in parts of the IT sector.

“For longer-term staff though, awards are often a little higher. We expect wages to pick up across the board next year as the recovery continues.”

A separate CBI survey showed economic growth slowed in the three months to August, with the reading at a five-month low of plus 21%, although expectations for the next quarter remained strong.

Mr Cridland said heightened tensions in Ukraine and the Middle East added to risks such as higher commodity prices and global market instability.

With party conference season approaching, he urged politicians in the UK “to focus on the UK’s long-term economic security, not just on winning the political race”.

Mr Cridland urged parties to commit to adopting the outcome of the Davies commission on airport capacity, saying businesses were “not going to accept cherry-picking” of the proposals and wanted to see “diggers on the ground before 2020”.

He said that as political positions of the major parties took shape ahead of the UK general election next year there were “things in each of the emerging manifestos that we like and things that we don’t like”.

“I think it’s clear that business has some doubts about the Labour party proposals about intervening in markets.

“In response to public concern about the perceived failings of some markets - in financial services, in energy, in housing - we are seeing proposals from Labour to intervene more in markets than governments have for the past generation.”

Meanwhile, Mr Cridland said the possibility of a yes vote in the Scottish independence referendum was “the most important risk that the CBI and business are facing”.

“The economic case for Scottish independence has not been made,” he said. “Overwhelmingly, British business believes that the UK should stay together.”

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